June 04, 2024
Court Challenge Looms, But Employers Urged to Prepare for New Overtime Rule

by Tammy Binford

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Employers are being advised to prepare for a new rule outlining which employees must be eligible for overtime pay, even though litigation threatens the U.S. Department of Labor’s (DOL) new and long-awaited regulation.

The new, two-phase approach to determining which employees are eligible for overtime pay may make the DOL’s newly issued final rule more acceptable to some employers, but a court challenge is still expected, according to attorneys who advise employers.

The new final rule, published in the Federal Register on April 26, will take effect July 1, with one salary threshold starting then and another, higher threshold set to take effect January 1, 2025.

The federal Fair Labor Standards Act requires hourly workers to earn time-and-a-half pay for hours over 40 in a workweek, but certain workers can be classified as exempt from that provision if they perform executive, administrative, or professional duties and earn at least a threshold amount.

Under the new rule, the threshold will go from $684 a week to $844 a week, or $43,888 a year, effective July 1. But the threshold will increase to $,1,128 a week, or $58,656 a year, effective January 1, 2025. The rule also stipulates that the threshold will be updated every three years.

In addition, the rule increases the threshold for certain highly compensated employees from $107,432 a year to $132,964 on July 1 and to $151,164 on January 1, 2025.

Court Challenges

This isn’t the first time in recent years that the DOL has tried to increase the salary threshold. The Obama administration tried to update the rule in 2016, but that effort—which would have raised the salary level from $455 to $933 a week—was struck down in court.

The Trump administration’s 2019 rule—which also has been challenged in court—raised the level to the current $684 a week. Legal action targeting the latest rule is also expected.

“There will be a long litigation path,” according to Burton J. Fishman, an attorney with FortneyScott in Washington, D.C.

Fishman says the new final rule uses the same formula used in the Trump rule and therefore may win support of conservative judges. Also, since the rule raises the threshold in two phases, it “gives courts a chance to ‘split this baby.’”

The two-phase approach, with it’s first level just under $44,000, “won’t mollify hard-core opponents, but there is a pattern in this carpet: Get to $44,000,” Fishman says, adding that other opponents note the approach “gives the courts a chance to fix the threshold at $44,000 and throw out the $58,000.”

Charles H. Kaplan, an attorney with Hodgson Ross LLP in New York City, says he believes the DOL is taking the two-step approach primarily for political reasons “so that the administration can contend that it has adopted a purported gradual approach.”

“There will be legal challenges to the final rule,” Kaplan says. “Challengers will argue that the DOL has outstripped its rulemaking authority by creating new salary thresholds that make nonexempt millions of workers whom the DOL has otherwise considered to be exempt.”

Also, Kaplan says the rule’s provision for automatic adjustments every three years likely violates the federal Administrative Procedure Act because those changes avoid the required notice-and-comment procedure before future new salary threshold increases.

Advice for Employers

Fishman advises employers to examine payroll, staffing, and working hours of affected employees so that they will be ready when or if a new rule takes effect.

Kaplan advises employers not to rush to make salary changes and instead wait to see what the courts decide since legal challenges are expected. “However, employers need to review their payrolls to be ready to increase employee salaries or choose to make current exempt employees nonexempt once the courts have sorted out the challenges to the final rule,” he says.

Raanon Gal, an attorney with Barnes & Thornburg LLP in Atlanta, Georgia, also urges employers to have a plan by thinking about whether they will increase the salary of affected employees or switch them to an hourly lower salary to account for overtime.

“At the same time, know there is a decent chance that a court strikes the rule down and keeps the status quo,” Gal says.

Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.

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